Role of Innovation in a Globalised World: A Review of ... · 2.1 Innovation - definition In...

FOCUS: Journal of International Business

Volume 5, Issue 2, July-December 2018, pp. 105-124

doi: 10.17492/focus.v5i2.14387

Role of Innovation in a Globalised World: A Review of Literature

Harmanpreet Kaur*

ABSTRACT

In today’s competitive environment, innovation has an important role to play. This is

extremely important for the growth of firms as well as the nation as it provides the requisite

competitiveness to them. Innovation is the commercialization of new ideas or invention.

In the context of India, investment in Research and Development (R&D) which is the most

commonly used input parameter for innovation is minimal and far below as compared to

its economic progress. The proportion of gross R&D expenditure (GERD) to gross

domestic product (GDP) in India is stagnant at 0.69% over the years 2014-17. This paper

is an attempt to discuss seminal work on innovation, its types, determinants, and their

impact on performance of the firms at the micro-level as examined by various researchers

for developed as well as developing nations.

Keywords: Innovation; R&D intensity; Science; Technology.

1.0 Introduction

In this era of globalisation, the world has become one big market for the firms

operating in different countries. Firms need to have a competitive advantage in order to

survive and sustain in the market. Thus, to stay competitive firms must grasp and adapt

the new advancements in technologies, organisational structures and flow of information

to the benefit of their organisation. The countries are now moving towards knowledge-

based economies. The knowledge and technology are considered to be the crucial propeller

of productivity, economic growth and innovation. The focus of the policymakers around

the world is on innovation. Innovation has become a vital component for investment in the

most recent times. The strategies are being formulated to promote innovation by making

substantial investments in knowledge-intensive activities namely, research, science and

technology.

________________________

*Assistant Professor, Shivaji College, University of Delhi, Delhi, India. (E-mail:

[email protected])

106 FOCUS: Journal of International Business, Volume 5, Issue 2, Jul-Dec 2018

Economists have defined innovation as the commercialization of new ideas or

invention. The prominence of innovation was recognized in the literature long ago. The

concept of innovation or technological change was put forth by Adam Smith and Karl

Marx in their works. The academic literature initiated to explore this remarkable fact called

innovation in an early 20th century. Nonetheless, the credit of first formal

conceptualization of innovation goes to Austrian economist Joseph Alois Schumpeter

(1942). The state-of-the-art work of Schumpeter acknowledged the indispensable role of

innovation or technological change in inducing productivity of firms and thus, economic

growth. Schumpeter formulated and analysed major hypothesis which claims that large

firms and the firms in highly concentrated markets accelerates innovative activity. Many

researchers have examined the relationship between firm size, market structure and

innovation to test the Schumpeterian hypothesis, yet there is no consensus.

In the wake of globalized and interdependent world, the companies’ structures

have undergone a complete overhaul and they are finding new ways of doing business.

The main purpose of this review article is to understand how the firms create and nurture

innovation through the analysis and synthesis of the existing research. The existing

research on innovation is inter-disciplinary in nature using diverse methods in different

countries. The objective of this study is to understand the concept of innovation and

identify the key determinants of innovation in firms.

The rest of the paper is organised as follows: Section 2 describes the conceptual

framework of innovation including its definition and measurement. Section 3 reviews the

existing literature on the topic and section 4 provides the conclusion.

2.0 Conceptual Framework

2.1 Innovation - definition

In today’s dynamic world, innovation has become a widely used term. The term

innovation originates in 1540’s from the Latin word ‘innovatus’ meaning ‘to renew or

change’. There have been ample definitions of innovation in the literature. Some classical

economists like Adam Smith and Karl Marx acknowledged the concept of technology or

technical change in their ancient works. According to Smith (1776), a division of labour

leads to specialization by concentrating on confined area of the production process and

thus provides more room for innovation to take place to facilitate their work. This increase

in productivity is due to the enhancement of technological knowledge because of learning

by doing. Consequently, this process leads to technological innovations. The economic

change is thought to be induced by incessantly changing technology. On the other hand,

Marx describes how labour-saving new machinery helps to achieve surplus value or extra

Role of Innovation in a Globalised World: A Review of Literature 107

profits. He proposed that capitalist introduces capital-intensive technologies to substitute

capital for labour when wages tend to increase. Thus, this technological change leads to

economic growth. The growth theory proposed by Solow incorporates technological

change as an exogenous factor along with labour and capital as endogenous variables to

the growth model. Further, another growth model known as New Growth Theory,

developed by Romer embraces technological change as an endogenous variable but this

theory is also based on the equilibrium models.

The work of Joseph A. Schumpeter is at the heart of economics of innovation

(Antonelli, 2009). Schumpeter is known as the pioneering author of innovation theory. He

proposed that economic development is a dynamic process and thus disequilibrium in the

economy can be explained by innovation. The major writings of Schumpeter which talks

about the theory of innovation are Theory of Economic Development (1912/1934),

Capitalism, Socialism and Democracy (Schumpeter, 1942) and Business Cycles: A

Theoretical, Historical, and Statistical Analysis of the Capitalist Process (Schumpeter,

1939). Schumpeter (1942) gives the phrase ‘gale of Creative Destruction’ in the context

of capitalism. According to him, this is a continuous process where innovation brings new

methods, new technologies and new firms that are more efficient and replace the old ones

if they fail to change as per the changing environment. Thus, the driving force behind

economic growth is innovation and entrepreneur who initiates the change.

The innovation process can be divided into four stages: invention, innovation,

diffusion and imitation. Schumpeter stipulates the vital distinction between invention and

innovation. Invention merely refers to the generation of new ideas or thoughts. It is an

intellectual activity without involving any economic decision. Instead, innovation refers

to the implementation of invention in the market i.e. transforming an invention into

marketable products and processes. Thus, innovation involves the economic decision of

commercialization of new ideas. The next stage in this process is diffusion which involves

dissemination of new ideas about products, processes or technologies across different

spheres of the economy including potential industries, firms and markets. According to

Schumpeter, imitation encompasses improvement over the original innovation in the same

or allied disciplines to reap the profits arising out of it. Eventually, the firm who have

introduced innovation at first place and have earned extra profits and monopoly power for

the same will be reduced because of the imitation. Thus, this is an endless process of

successive innovations.

Further, Schumpeter categorised innovation into five modes:

a) Launch of products that are new to the customers.

b) Establishment of production methods that are new to firms or industries.

c) Unleashing markets that are new in the sense they were not explored or served before.


d) Procurement of new sources of supply of raw materials and semi-finished goods.

e) Introduction of a new form of organisational structure in specific industries.

In addition, Schumpeter has also developed and tested two major hypotheses

which postulate that firms with large size and having monopoly power i.e. presence of

imperfect competition stimulates innovation. Most of the empirical literature on

determinants of innovation have also tried to test these two hypotheses.

The fundamental definition and types of innovation are specified by the

Organisation for Economic Cooperation and Development (OECD) in collaboration with

European Commission in the Oslo Manuals prepared for measuring science, technology

and innovation data. Based on the Schumpeter’s definition, the Oslo Manual postulates a

comprehensive definition of innovation stating that “An innovation is the implementation

of a new or significantly improved product (good or service), or process, a new marketing

method, or a new organisational method in business practices, workplace organisation or

external relations” (OECD, 2005, p.46).

The application of innovation is at the heart of this definition. It involves

employment of new ideas to generate a value for the organisation. The definition

incorporates both ‘new to the firm’ and ‘new to the world’ innovations too. This definition

extensively includes various categories of innovations that can be undertaken by the firm.

2.2 Measuring innovation

After discussing the definition and various types of innovation, the next question

that arises is how to measure innovation. The empirical literature is inconclusive about the

measurement of innovation efforts and activities. Though, to some extent distinction is

made between input-based and output-based measures of innovation activity. The input-

based measures of innovative activity incorporated in the literature basically include in-

house R&D expenditure, number of employees in R&D department and R&D expenditure

as a ratio of any size measure like sales or number of employees (Levin, Cohen & Mowery,

1985; Cohen, Levin & Mowery, 1987; Kumar, 1987; Siddharthan, 1988; Holbrook &

Squires, 1996; Kumar & Saqib, 1996; Grabowski & Vernon, 2000; Pradhan, 2003; Shefer

& Frenkel, 2005; Mahlich & Roediger-Schluga, 2006; Mishra, 2007; Narayanan & Bhat,

2009; Pamukçu & Utku-İsmihan, 2009). According to Oslo Manual, expenditures on in-

house R&D, extramural R&D, procurement of external knowledge, purchase of machinery

& equipment’s, training of workforce, marketing and other preparations for product and

process innovations are treated as input-based innovation activities (OECD, 2005). In the

empirical literature, output-based measures of innovative activity used are patent

applications or counts, number of innovations introduced, number of new product

announcements, proportion of sales due to new products or processes and dummy


variables representing presence or absence of innovation. Another way of measuring

innovation is creating an index of some input or output-oriented measures of innovation

(Arvanitis, 1997; Romijn & Albaladejo, 2002; Wang, Ong & Lee, 2005; Krasniqi &

Kutllovci, 2008; Mahendra, Zuhdi & Muyanto, 2015; Zemplinerová & Hromádková,

2012). Alternatively, innovation can be measured more sophisticatedly using innovation

surveys. The different countries conduct surveys to know their incidence of innovation

and the most popular one in the series is Community Innovation Surveys (CIS) in the

European Countries.

3.0 Review of Literature

The literature has been divided into two sections, first one dealing with the studies

on firm-level determinants of innovation for developed countries. The second part deals

with examining firm-level determinants of innovation with reference to developing

countries.

Most of the studies in the literature have empirically tested Schumpeter’s

hypothesis. The Schumpeter hypothesis has suggested large firms in monopolistic markets

stimulates innovation. Thus, role of firm size and market structure in determining

innovative activity was the main focus of the researchers. Various other firm-specific and

industry-specific factors affect the innovation activity of the firms. The variables included

in different studies to determine innovation are not mutually exclusive but they are

coinciding.

3.1 Developed economies

Mainstream studies on factors causing innovation are concentrated in developed

nations like U.S., U.K. and European countries. The probable reason for this is the easy

availability of data and national surveys being conducted by these countries to measure

their innovation capacity.

Horowitz (1962) examines the relationship between indices of market

concentration, firm size and various measures of research activity of U.S. firms in 29

industries for the year 1956 using rank correlations. The result shows the firms in more

concentrated industries tend to incur more research expenditure and maintain research

organisations. The larger firms are more inclined towards research activity than their

smaller counterparts, instead, small firms don’t have their own laboratories but purchase

research elsewhere. Using data of invention patents issued in 1959 as measure of

innovation, Scherer (1965) examines the association between patents issued and

technological opportunity, firm size, product line diversification and monopoly power for


the 448 firms on Fortune’s list of 500 largest U.S. firms. The empirical analysis using

regressions suggest the number of patents issued increases with firm size but less than

proportionately. The inter-industry differences in inventive output are because of

difference in technological opportunity.

Further, studies relating to determinants of innovation have predominantly

focused on manufacturing industries (Levin, Cohen & Mowery, 1985; Cohen, Levin &

Mowery, 1987; Acs & Audretsch, 1987, 1988; Koeller, 1995; Vossen, 1999; Bhattacharya

& Bloch, 2004; Castillejo et al., 2006; Vaona & Pianta, 2008). Levin, Cohen and Mowery

(1985) examine the impact of concentration on innovative effort and innovative output

after taking into account the technological opportunity and R&D appropriability of U.S.

manufacturing firms for the year 1976. The R&D intensity and innovation are regressed

using OLS and 2SLS models. When we take only concentration variable into account, the

results show a significant impact of concentration on innovative effort and output even

after controlling for fixed effects and industry fixed effects. Nevertheless, when

technological opportunity and appropriability are taken into consideration to explain inter-

industry variations in R&D intensity and innovative output, the market concentration

variable becomes insignificant.

It is worth noting that an attempt has been made to study that how small and large

firms innovate (Acs & Audretsch, 1987, 1988; Acs, Audretsch & Feldman 1994; Koeller,

1995) as well as innovation in high-tech and low-tech firms (Audretsch & Acs, 1991). Acs

and Audretsch (1987) postulate that relative innovative advantage of small and large firms

is imputable to the magnitude of imperfect competition in the U.S. 247 four-digit SIC

manufacturing industries for the year 1982. Using cross-sectional regression, they found

industries with high capital intensity, unionization, concentration and product

differentiation leads to innovation in large firms. While the small firms’ innovation is

determined by their presence in the industries that are highly innovative, have a large

proportion of skilled labour and large firms. Similarly, Koeller (1995) studies the two

equations model to investigate the relationship between innovative output and market

structure for four-digit SIC manufacturing industries in U.S. The regression analysis using

OLS and 2SLS is conducted by taking a total number of innovations, large firm

innovations and small firm innovations in an industry introduced in the year 1982 as well

as concentration ratio between 1977 and 1982. On the basis of the analysis, concentration

and capital intensity are significantly negatively related to overall innovative output while

R&D expenditure has a significant positive impact on overall innovative output though

they have a greater impact on small firm innovations than on large firm innovations. Large

firm innovative output increases with high advertising intensity and a skilled workforce.

Audretsch and Acs (1991) concluded that firms in more capital-intensive industries tends


to be more innovative in the case of high-tech industries. On the other hand, low-tech firms

exhibit increasing returns to firm size in generating innovative output.

Acs, Audretsch and Feldman (1994) investigate the source of innovation for small

firms, to what extent university and corporations expenditures on R&D spills over to small

and large firms in U.S.A. Evidently, small firms have a relative advantage in utilizing

spillovers from knowledge created in university laboratories, whereas knowledge created

by large firms are well exploited by large firms themselves than the small firms.

A large part of the literature on innovation focusses on drivers of innovation for

firms in the European countries (Kraft, 1989; Geroski, 1990; Arvanitis, 1997; Vossen,

1999; Castillejo et al., 2006; De Jong & Vermeulen, 2006; Krasniqi & Kutllovci, 2008;

Vaona & Pianta, 2008; Zemplinerová & Hromádková, 2012; Sanyal & Vancauteren, 2014;

Alsharkas, 2014; Abazi-Alili, 2014). Arvanitis (1997) studies the impact of firm size on

innovative activity for 914 firms in the Swiss manufacturing industries for the period

1991-93. Both input and output oriented measures of innovation are analysed using

ordered Probit and Tobit models. The result depicts innovation performance increases less

than proportionately with firm size i.e. inverted U shaped. However, there are significant

differences in orientation regarding the innovation of small and large firms. Large firms

face non price competition and international environment so they create new products and

processes by using patents and knowledge originated from research in university labs etc.

whereas small firms operate in niche markets, faces price competition, and they innovate

by making small improvements both in products and processes while using protection

strategies like secrecy, time lead in introducing pioneering products. Vossen (1999)

assessed the impact of industrial concentration and firm size on innovative activity in

Dutch manufacturing firms. It reveals there is a positive impact of industrial concentration

on R&D expenditure and this effect does not differ significantly across industries. Further,

R&D intensity in smallest firm size class is strongly impacted by concentration and in case

of larger firm size classes, the effect dampens. Gustavsson and Poldahl (2003) use the data

set of manufacturing firms from Sweden over the period 1990-99 to examine firm-level

determinants of R&D expenditures using panel regressions. Subsequently, result depicts

competition and high firm turnover rate (i.e. entry & exit in the industry) negatively

impacts firm R&D expenditure. Firm’s export ratio and other concerns R&D intensity are

used as a proxy for technology spillovers and positive relationship of both the variables

illustrate the existence of knowledge spillovers. Human capital and capital intensity

positively influence R&D spending.

Different variables have been included in the studies but the results obtained are

mixed. Castillejo et al. (2006) investigate the causal factors for likelihood of investment

in R&D by Spanish firms for the period 1990-2000 using panel data discrete choice model.


Firm age and foreign capital negatively influence a firm’s propensity to invest in R&D.

Besides, export intensity, market share, qualified workforce, firm size, labour productivity,

advertising intensity, and regional and local technological spillovers foster the probability

of investment in R&D. In contrast, the firm size, firm age, foreign ownership and foreign

competition have significant positive impact on innovation of firms in Central Eastern and

South-Eastern European Countries (Krasniqi & Kutllovci 2008; Abazi-Alili, 2014). Vaona

and Pianta (2008) probes distinct business strategies and innovation inputs leading to

product and process innovation respectively for 22 manufacturing industrial sectors of 8

European countries using random effect GMM error component model for the year 1994-

96. The result depicts product innovation is significantly and positively associated with

market expansion strategy and patenting activities while expanding markets through active

price competitiveness strategy, acquisition of new machinery and production process

flexibility leads to process innovation. In both product and process innovation, large firms

perform better than the small and medium-sized firms. Zemplinerová and Hromádková

(2012) analyses the firm-level determinants of innovation in the context of how growth,

subsidies and innovation are inter-related for Czech Republic firms for the period 2004-

07 by employing CDM four-stage model. The results postulate firm size is positively

related to the decision to innovate and innovation investment but negatively impacts

innovation output. Similarly, access to subsidies boost expenditure for innovation inputs

but at the national level negatively impacts innovation output. Further, Innovation output

positively impacts labour productivity. Studies by Bhattacharya and Bloch (2004) and

Rogers (2004) found a positive relationship between firm size, R&D intensity, export

intensity and innovative activity for Australian firms for the year 1997 using Probit

regression.

There are relatively less studies which relates to industrial sectors other than

manufacturing sectors. Kraft (1989) examined the factors that lead to product innovation

in 57 medium- sized firms of metal industry in West Germany for the year 1979 using

sales of newly developed products in the last five years as a proxy for innovation. The

Single Equation Model and Instrumental Variable analysis are used which shows similar

results. The results shows the market structure and barriers to entry have a significant

positive impact on innovation. Further, the results depict firms that are technologically

advanced and have owner-managers lead to higher innovation. The determinants of

innovation in pharmaceutical sector has also been studied by many researchers

(Grabowski & Vernon, 2000; Acemoglu & Linn, 2004; Mahlich & Roediger-Schluga,

2006; Sanyal & Vancauteren, 2014). Grabowski and Vernon (2000) found both expected

returns and cash flows positively and significantly impact pharmaceutical R&D using

pooled data of 11 firms over a period of 1974 to 1994 in U.S. Similarly, for pharmaceutical


firms in Japan expected returns depicts significant positive relation with R&D expenditure

though, it’s small. Cash flows depicting financial constraints shows that due to the

difference in financial structures Japanese firms face fewer restraints than U.S. firms. The

dynamic model including lagged R&D expenditure depicts that it does have a positive

impact (Mahlich & Roediger-Schluga, 2006). Sanyal & Vancauteren (2014) provides

insights into firm level factors which impact R&D investment in Dutch pharmaceutical

sector using panel data Heckman’s Tobit II regression technique for the period 1996-2006.

The results of the analysis depict firm size and age have a negative impact on R&D. Other

explanatory variables namely, capital intensity, market share, Lerner index shows a

significant positive influence on R&D.

3.2 Developing economies

The literature on determinants of innovation in the context of developing countries

is relatively sparse. The results of studies focusing on developing countries are mixed. The

reason for this might be presence of country-specific, industry-specific factors and

methodology used for the analysis.

Lee (2004) investigates how the firm and industry-specific characteristics

influence the tendency of firms to innovate in the Malaysian manufacturing sector for the

period 2000-01. The results indicate that firm size has a significant positive impact on

innovation. Further private & public limited firms have the highest propensity to innovate

as compared to other ownership structures. Moreover, the export intensity has a negative

relation with a propensity to innovate and market concentration is positively related to

innovation. In contrast, Shefer and Frenkel (2005) using ANOVA, t-test and multiple

regression found negative impact of firm size on R&D expenditure for the high tech group

of companies located in metropolitan and intermediate areas in northern part of Israel.

However, the firms associated with large concern groups tends to invest more in R&D

than individually owned firms. Moreover, firm’s age, level of turnover significantly

adversely impact R&D investment whereas the level of exports grows with firm size

irrespective of its location and industrial type. Ahmed and Mahmud (2011) examine

internal and external characteristics of firms that leads to innovation in the manufacturing

sector in Pakistan. The findings using panel data Probit model suggest firm size, quality

of human capital and presence of firms in cluster significantly and positively impacts

innovative capacity. Further, large firms perform better than small firms in innovative

activities nevertheless when medium firms are part of clusters their probability to innovate

increases in comparison to small and medium firms located outside the clusters.

Mahendra, Zuhdi and Muyanto (2015) aims to identify the determinants of

innovation in Indonesia in the context of role played by institutional quality and access to


finance. The results of the analysis indicate better institutional quality leads to more

product innovation and impediments to access finance hampers product innovation.

Moreover, the study also depicts that for large firms institutional quality is more important

and in the case of small firms, access to finance is more crucial. Abderrezzak, Wafaa and

Benabbou (2016) studies the key determinants of innovation in Algerian SME’s for the

year 2014 using principal component analysis and structural equation modelling. The

result depicts capacity to innovate depends mainly upon entrepreneur, human skills,

financial capability, collaboration with the external environment, competitive pressure and

R&D. Hadhri, Arvanitis and M’henni (2016) examines the determinants of innovation for

Lebanese firms for the year 2012 using Probit regression and instrumental variable

models. The result of the analysis suggests that probability of innovation is positively

affected by firm size, export, R&D activities, partnership, technology transfer, presence

of skilled workforce with the presence of R&D activities and also foreign capital with

R&D. Abdu and Jibir (2017) analyzed the factors that influence innovation of firms in

Nigeria for 2014-15 using binary Probit and Tobit regressions. The result signifies

negative influence of a firm’s age and employee’s education on the propensity to innovate.

On the other hand, propensity to innovate increase with increase in research and

development (R&D) expenditure, formal training, firm size, exporting status, presence of

competitors, location, type and sector, or activity of firms.

In developing countries like India, in spite of the role and importance of

innovation in growth, the studies related to drivers of innovation are scanty. Kumar (1987)

explores the relationship between two modes of technology imports (i.e. FDI or licensing

mode) and local in-house R&D intensity across 43 industries in India for 1978-1981 using

regression analysis. The result shows firms in industries with a high share of foreign-

controlled enterprises have a negative relationship with R&D intensity whereas another

mode of technology imports depicted by fees for licensing technology positively

influences R&D intensity. Higher concentration ratio and capital intensity dampens R&D

activity. Firms in chemical industries and firms with high advertising intensity tends to

invest more in R&D. Siddharthan (1988) examines the relationship between in-house

R&D expenditure, technology imports and size of the firm for the pool of public and

private sector firms using regression for 166 Indian manufacturing firms for the year 1983-

84. The results specify non-linear relationship between in-house R&D expenditure and

firm size depicted by “U” shape. While for private firms, there is evidence of a

complementary relationship between in-house R&D efforts and technology imports

besides stronger complementarity is found for firms in low-technology industries. Kumar

and Saqib (1996) found no relationship between technology imports and R&D activity

neither of substitution nor complementary for 291 manufacturing firms in India for the


year 1977-78 to 1980-81 using Probit and Tobit models. Further, findings propose that the

relationship between firm size and probability of undertaking R&D activity is inverted ‘U’

shaped whereas, R&D intensity is linearly related to firm size. The export orientation and

the firms with a greater degree of in-house production favourably impact both R&D

probability and intensity. Narayanan and Bhat (2009) empirically investigate the

determinants of technological strategies of firms for Indian basic chemical industry using

cross-tabulations and Tobit model on panel data for the period 1997-2003. The

relationship between R&D intensity and import intensity of embodied or disembodied

technology is significantly negative i.e. substitutive. Further, the dummy and interactive

dummy variables of various strategies depict firms that use a combination of technological

strategies having high technology import intensity have a significant positive impact on

R&D intensity than passive firms. Aijaz (2016) studies the role of in-house R&D

expenditure in stimulating innovation and entrepreneurship in the Indian manufacturing

sector to keep up the pace of growth.

The non-linear relationship between R&D intensity and firm size (size square)

depicting inverted U shape is observed in Indian industries (Pradhan, 2003; Mishra, 2007;

Narayanan & Thomas, 2007; Narayanan & Bhat, 2009). Mishra (2007) analyses the

impact of firm and industry-specific characteristics on the R&D intensity of the cross-

section of Indian firms for the year 2004 using Tobit Maximum Likelihood technique. The

analysis shows that firm-specific characteristics namely firm size, age, human capital and

market share have a significant positive impact on R&D intensity while export orientation

does not have any significant impact. Basant and Mishra (2013) studies how anticipated

market concentration causes inter-industry variations in in-house R&D efforts in Indian

manufacturing industry after controlling various factors relating to performance, policy,

market structure and firm’s conduct. The Arellano-Bond dynamic panel estimation

technique is used on the panel data of 34 manufacturing industries for the period 2001-02

to 2008-09. The result indicates in-house R&D efforts are more in industries which have

firms with greater lagged R&D intensity, MNC participation, capital intensity and export

intensity. On the other hand, industries with more mergers and acquisitions and import

intensity have a significant negative impact on innovation efforts.

In the context of developing countries also, studies are mainly focused on

manufacturing industries only. Few studies analyses the innovative activities in

pharmaceutical sector (Pradhan, 2003; Narayanan & Thomas, 2007; Lee & Choi, 2015).

Pradhan (2003) analyses the R&D performance of Indian pharmaceutical firms in the

context of economic liberalization after controlling firm-specific factors across the period

1989-2001 employing Tobit regression. The results purport that increase in firm age, size,

profitability, intangible assets, export orientation and outward foreign direct investment


enhances R&D activity of firms. Moreover, firm size has a non-linear inverted U-shaped

relationship with R&D intensity. Further, liberalization has positive influence on R&D

performance. Narayanan and Thomas (2007) found firm size, export intensity, technology

embodied import intensity, age, advertising intensity have a significant positive relation

with a probability of investing in R&D and R&D intensity using Probit and Tobit models

for dataset of 173 Indian pharmaceutical firms over 1990-2005. Size square is negatively

significant depicting an inverted U shaped relationship in both the models. Further results

also state that there is significant negative relationship of foreign ownership and outward

investment dummies with a probability of undertaking R&D. Lee and Choi (2015)

explores how the financial structures of Korean pharmaceutical companies’ impacts R&D

investment decisions of the firms using panel data fixed effects regression model for the

period 2000-2012. The results elucidate positive relationship between liquidity and R&D

investment. Further, growth and stability negatively influence R&D investment.

On the whole, the reviewed literature includes research papers which focuses on

broader range of variables as determinants of innovation. Annexure 1 shows the

determinants of innovation and their respective influence (positive/negative) on

innovation identified in the research. The empirical evaluation of Schumpeter hypothesis

shows diverse results. Further, the focus of prior studies is restricted to manufacturing

sector and comparisons of manufacturing vs. non-manufacturing sector or high-

technology vs. low-technology sector. The review of the literature presents a diverse

opinions, results and approach as innovation literature emerges from various disciplines,

yet attempts have been made to follow a holistic approach.

4.0 Conclusion and Recommendations

In today’s competitive environment, innovation has gained centre stage. It has

become a key solution for tackling new challenges and opportunities in today’s rapidly

changing world. It is the vital ingredient for a firm’s survival and success. This paper is an

attempt to provide an overview of theoretical and empirical insights from literature on

innovation that analyses their determinants and impact on firm’s performance and growth.

Though innovation is considered to be relatively new area of research. It has been

observed that the research on innovation has been attempted from various disciplines.

Despite the fact, there is no general theory of innovation and it is fragmented. This paper

makes an effort to understand the concept of innovation and its associated terminologies.

Further, the innovation can be measured using input and output oriented indicators of

innovation. Thus, various methodologies along with different measurement indicators of

innovation makes it complex to understand and analyse the determinants of innovation.


The thorough examination of literature has revealed an array of determinants of firms’

innovation. These determinants must be considered by the all the firms although the

relationship between them may vary as per the specific firm and industry.

Further studies can be undertaken in different ways to fill the evident research

gaps for instance, cross-industry analysis can be done including industries other than

manufacturing sector and comparisons can be made. Also, cross-country analysis is

another plausible area of research. Moreover, as the output measure of innovation is not

well developed in developing countries attempt should be made to identify and develop

the same.

References

Abazi-Alili, H. (2014). Innovation activities and firm performance: Empirical evidence

from transition economies. Journal of Contemporary Economic and Business Issues, 1(2),

5-18.

Abderrezzak, B., Wafaa, B., & Benabbou, S. (2016). Key determinants of innovation in

the Algerian SMEs. Topics in Middle Eastern and African Economies, 18(1), 183-200.

Abdu, M., & Jibir, A. (2017). Determinants of firms innovation in Nigeria. Kasetsart

Journal of Social Sciences, 39(3), 448-456.

Acemoglu, D., & Linn, J. (2004). Market size in innovation: theory and evidence from the

pharmaceutical industry. The Quarterly Journal of Economics, 119(3), 1049-1090.

Acs, Z. J., & Audretsch, D. B. (1987). Innovation, market structure, and firm size. The

review of Economics and Statistics, 69(4), 567-574.

Acs, Z. J., & Audretsch, D. B. (1988). Innovation in large and small firms: An empirical

analysis. The American Economic Review, 78(4), 678-690.

Acs, Z. J., Audretsch, D. B., & Feldman, M. P. (1994). R & D spillovers and recipient firm

size. The Review of Economics and Statistics, 76(2), 336-340.

Ahmed, H., & Mahmud, M. (2011). What determines innovation in the manufacturing

sector? Evidence from Pakistan. The Pakistan Development Review, 50(4), 365-376.


Aijaz, M. (2016). Innovations and research and development spending in India’s

manufacturing sector: growth implications. PRAGATI: Journal of Indian Economy, 3(1),

21-33.

Alsharkas, Z. (2014). Firm size, competition, financing and innovation. International

Journal of Management and Economics, 44(1), 51-73.

Antonelli, C. (2009). The economics of innovation: from the classical legacies to the

economics of complexity. Economics of Innovation and New Technology, 18(7), 611-646.

Arvanitis, S. (1997). The impact of firm size on innovative activity–an empirical analysis

based on Swiss firm data. Small Business Economics, 9(6), 473-490.

Audretsch, D. B., & Acs, Z. J. (1991). Innovation and size at the firm level. Southern

Economic Journal, 57(3), 739-744.

Basant, R., & Mishra, P. (2013). Concentration and other determinants of innovative

efforts in Indian manufacturing sector: A dynamic panel data analysis (IIMA Working

Papers WP2013-02-01). Retrieved from https://web.iima.ac.in/assets/snippets/

workingpaperpdf/1112015402013-02-01.pdf

Bhattacharya, M., & Bloch, H. (2004). Determinants of innovation. Small Business

Economics, 22(2), 155-162.

Castillejo, J. A. M., Barrachina, M. E. R., Llopis, A. S., & Llopis, J. A. S. (2006). The

decision to invest in R&D: a panel data analysis for Spanish manufacturing. International

Journal of Applied Economics, 3(2), 80-94.

Cohen, W. M., Levin, R. C., & Mowery, D. C. (1987). Firm size and R&D intensity: A

re-examination. Journal of Industrial Economics, 35(4), 543-565.

De Jong, J. P., & Vermeulen, P. A. (2006). Determinants of product innovation in small

firms: A comparison across industries. International Small Business Journal, 24(6), 587-

609.

Geroski, P. A. (1990). Innovation, technological opportunity, and market structure. Oxford

Economic Papers, 42(3), 586-602.


Grabowski, H., & Vernon, J. (2000). The determinants of pharmaceutical research and

development expenditures. Journal of Evolutionary Economics, 10(1), 201-215.

Gustavsson, P., & Poldahl, A. (2003). Determinants of firm R&D: Evidence from Swedish

firm level data. FIEF Working Paper No. 190. Retrieved from

https://swopec.hhs.se/fiefwp/papers/WP190.pdf

Hadhri, W., Arvanitis, R., & M’Henni, H. (2016). Determinants of innovation activities in

small and open economies: The Lebanese business sector. Journal of Innovation

Economics & Management, 21(3), 77-107.

Holbrook, J. A. D., & Squires, R. J. (1996). Firm-level analysis of determinants of

Canadian industrial R&D performance. Science and Public Policy, 23(6), 369-374.

Horowitz, I. (1962). Firm size and research activity. Southern Economic Journal, 28(3),

298-301.

Koeller, C. T. (1995). Innovation, market structure and firm size: a simultaneous equations

model. Managerial and Decision Economics, 16(3), 259-269.

Kraft, K. (1989). Market structure, firm characteristics and innovative activity. The

Journal of Industrial Economics, 37(3), 329-336.

Krasniqi, B. A., & Kutllovci, E. A. (2008). Determinants of innovation: evidence from

Czech Republic, Poland and Hungary. International Journal of Techno Entrepreneurship,

1(4), 378-404.

Kumar, N. (1987). Technology imports and local research and development in Indian

manufacturing. The Developing Economies, 25(3), 220-233.

Kumar, N., & Saqib, M. (1996). Firm size, opportunities for adaptation and in-house R &

D activity in developing countries: the case of Indian manufacturing. Research Policy,

25(5), 713-722.

Lee, C. (2004). The determinants of innovation in the Malaysian manufacturing sector: an

econometric analysis at the firm level. ASEAN Economic Bulletin, 21(3), 319-329.


Lee, M., & Choi, M. (2015). The determinants of research and development investment in

the pharmaceutical industry: focus on financial structures. Osong Public Health and

Research Perspectives, 6(5), 302-309.

Levin, R. C., Cohen, W. M., & Mowery, D. C. (1985). R & D appropriability, opportunity,

and market structure: New evidence on some Schumpeterian hypotheses. The American

Economic Review, 75(2), 20-24.

Mahendra, E., Zuhdi, U., & Muyanto, R. (2015). Determinants of firm innovation in

Indonesia: The role of institutions and access to finance. Economics and Finance of

Indonesia, 61(3), 149-179.

Mahlich, J. C., & Roediger-Schluga, T. (2006). The determinants of pharmaceutical R&D

expenditures: evidence from Japan. Review of Industrial Organisation, 28(2), 145-164.

Mishra, V. (2007). The determinants of R&D expenditure of firms: Evidence from a cross‐

section of Indian firms. Economic Papers: A Journal of Applied Economics and Policy,

26(3), 237-248.

Narayanan, K., & Bhat, S. (2009). Technology sourcing and its determinants: A study of

basic chemical industry in India. Technovation, 29(8), 562-573.

Narayanan, K., & Thomas, R. (2007, November). The determinants of R&D in the Indian

pharmaceutical sector: A firm level study of outward investors. Paper presented at

International Conference on Globalisation of Chinese and Indian Enterprises, Indian

Institute of Technology Bombay, India. Retrieved from

http://fgks.in/images/pdf/papers/61.pdf

Organisation for Economic Co-operation and Development, & Statistical Office of the

European Communities. (2005). Oslo manual: Guidelines for collecting and interpreting

innovation data. Paris: Organisation for Economic Co-operation and Development.

Retrieved from https://doi.org/10.1787/9789264013100-en

Pamukçu, T., & Utku-İsmihan, F. M. (2009, June). Determinants of R&D decisions of

firms in developing countries the case of Turkey. Paper presented at Anadolu International

Conference in Economics, Eskiehir, Turkey. Retrieved from http://citeseerx.ist.psu.edu/

viewdoc/download?doi=10.1.1.511.4154&rep=rep1&type=pdf

https://doi.org/10.1787/9789264013100-en


Pradhan, J. P. (2003). Liberalization, firm size and R&D performance: A firm level study

of Indian pharmaceutical industry. Journal of Indian School of Political Economy, 14(4),

647-666.

Rogers, M. (2004). Networks, firm size and innovation. Small Business Economics, 22(2),

141-153.

Romijn, H., & Albaladejo, M. (2002). Determinants of innovation capability in small

electronics and software firms in southeast England. Research Policy, 31(7), 1053-1067.

Sanyal, S., & Vancauteren, M. (2014). R&D and its determinants: A study of the

pharmaceutical firms in the Netherlands. Retrieved from https://cit2014.sciencesconf.org/

conference/cit2014/pages/Full_Paper_Shreosi_Sanyal.pdf

Scherer, F. M. (1965). Firm size, market structure, opportunity, and the output of patented

inventions. The American Economic Review, 55(5), 1097-1125.

Schumpeter, J. A. (1934). The theory of economic development: An inquiry into profits,

capital, credit, interest, and the business cycle (R. Opie, Trans.). Cambridge, MA: Harvard

University Press. (Original work published 1912)

Schumpeter, J. A. (1939). Business cycles (Vol. 1, pp. 161-74). New York: McGraw-Hill.

Schumpeter, J. A. (1942). Capitalism, socialism, and democracy. New York, London:

Harper and Brothers.

Shefer, D., & Frenkel, A. (2005). R&D, firm size and innovation: an empirical analysis.

Technovation, 25(1), 25-32.

Siddharthan, N. S. (1988). In‐house R&D, imported technology, and firm size: lessons

from Indian experience. The Developing Economies, 26(3), 212-221.

Smith, A. (1776). An inquiry into the wealth of nations. London: Strahan and Cadell.

Vaona, A., & Pianta, M. (2008). Firm size and innovation in European manufacturing.

Small Business Economics, 30(3), 283-299.


Vossen, R. W. (1999). Market power, industrial concentration and innovative activity.

Review of Industrial Organisation, 15(4), 367-378.

Wan, D., Ong, C. H., & Lee, F. (2005). Determinants of firm innovation in Singapore.

Technovation, 25(3), 261-268.

Zemplinerová, A., & Hromádková, E. (2012). Determinants of firm’s innovation. Prague

Economic Papers, i(4), 487-503.

Annexure 1: A Review of the Association of Distinct Variables with Innovation in

the Literature

S.No. Variable

s

Significant Insignificant

Positive Negative Positive Negative

1. Firm Size Horowitz, 1962; Scherer, 1965; Audretsch

& Acs, 1991; Kumar & Saqib, 1996;

Arvanitis, 1997; Pradhan, 2003;

Bhattacharya & Bloch, 2004; Rogers, 2004;

Lee, 2004; Acemoglu & Linn, 2004;

Castillejo et al., 2006; Mishra, 2007;

Narayanan & Thomas, 2007; Krasniqi &

Kutllovci, 2008; Narayanan & Bhat, 2009;

Pamukçu & Utku-İsmihan, 2009; Ahmed &

Mahmud, 2011; Zemplinerová &

Hromádková, 2012; Alsharkas, 2014;

Abazi-Alili, 2014; Mahendra, Zuhdi &

Muyanto, 2015; Hadhri, Arvanitis &

M’henni, 2016; Abdu & Jibir, 2017

Siddharthan, 1988;

Holbrook & Squires,

1996; Gustavsson &

Poldahl, 2003; Shefer

& Frenkel, 2005;

Sanyal &

Vancauteren, 2014;

Cohen,

Levin &

Mowery,

1987;

Kraft,

1989;

Basant &

Mishra,

2013;

2. Size

Square

Siddharthan, 1988; Scherer, 1965;

Arvanitis, 1997;

Pradhan, 2003;

Bhattacharya &

Bloch, 2004; Mishra,

2007;Narayanan &

Thomas, 2007;

Narayanan & Bhat,

2009; Pamukçu &

Utku-İsmihan, 2009;

Kumar &

Saqib,

1996;

3. Age Mishra, 2007; Narayanan & Thomas, 2007;

Krasniqi & Kutllovci, 2008; Narayanan &

Shefer & Frenkel,

2005; Castillejo et al.,

2006; Sanyal &

Kumar &

Saqib,

1996;

Siddhartha

n, 1988;

Lee, 2004;


Bhat, 2009; Mahendra, Zuhdi & Muyanto,

2015;

Vancauteren, 2014;

Abdu & Jibir, 2017

Hadhri,

Arvanitis

&

M’henni,

2016

4. Market

Share

Mishra, 2007; Castillejo et al., 2006;

Narayanan & Bhat, 2009; Sanyal &

Vancauteren, 2014; Alsharkas, 2014;

5. Growth Geroski, 1990; Lee & Choi, 2015; Bhattachar

ya &

Bloch,

2004;

6. Profit Grabowski & Vernon, 2000; Pradhan, 2003;

Mahlich & Roediger-Schluga, 2006;

Narayanan & Thomas, 2007;

Kumar & Saqib,

1996; Pamukçu &

Utku-İsmihan, 2009;

Scherer,

1965;

Bhattachar

ya &

Bloch,

2004;

Narayanan

& Thomas,

2007;

Kumar,198

7;Kumar &

Saqib,

1996;

Basant &

Mishra,

2013;

7. Capital

Intensity

Acs & Audretsch, 1987; 1988; Audretsch &

Acs, 1991; Kraft, 1989; Geroski, 1990;

Gustavsson & Poldahl, 2003; Sanyal &

Vancauteren, 2014; Basant & Mishra, 2013;

Kumar, 1987;

Koeller, 1995;

8. Employe

e Skills

Intensity

Acs & Audretsch, 1987; 1988; Audretsch &

Acs, 1991; Koeller, 1995; Romijn &

Albaladejo, 2002; Gustavsson & Poldahl,

2003; Rogers, 2004; Castillejo et al., 2006;

Mishra, 2007; Pamukçu & Utku-İsmihan,

2009; Ahmed & Mahmud, 2011; Abazi-

Alili, 2014; Abdu & Jibir, 2017

Kraft,

1989;

9. Export

Intensity

Kumar & Saqib, 1996; Pradhan, 2003;

Romijn & Albaladejo, 2002; Gustavsson &

Poldahl, 2003; Bhattacharya & Bloch, 2004;

Rogers, 2004; Shefer & Frenkel, 2005;

Castillejo et al., 2006; Narayanan &

Thomas, 2007; Krasniqi & Kutllovci, 2008;

Basant & Mishra, 2013; Abazi-Alili, 2014;

Hadhri, Arvanitis & M’henni, 2016; Abdu

& Jibir, 2017;

Lee, 2004; Mishra,

2007;

10. Import

Intensity

Bhattacharya & Bloch, 2004; Basant & Mishra,

2013;


11. Technolo

gy

Purchase

Intensity

Kumar, 1987; Siddharthan, 1988;

Narayanan & Thomas,2007; Pamukçu &

Utku-İsmihan, 2009; Hadhri, Arvanitis &

M’henni, 2016;

Narayanan & Bhat,

2009;

Narayanan

& Thomas

(2007)

Kumar &

Saqib,

1996;

Pradhan,

2003;

Basant &

Mishra,

2013;

Source: Author’s own compilation

Role of Innovation in a Globalised World: A Review of ... · 2.1 Innovation - definition In...

Documents

Transcript of Role of Innovation in a Globalised World: A Review of ... · 2.1 Innovation - definition In...